Gross domestic product or GDP is the broadest measure of the health of the US economy. Real GDP is defined as the output of goods and services produced by labor and property located in the United States.' This series generally lags other indicators' release dates. As such, other indicators "build up" to the market's anticipation of how the GDP numbers describe the state of the economy.
Real GDP is an important indicator to track because it provides the greatest and broadest sectoral detail of any other series. Data reflect income as well as expenditure flows. Sectoral coverage includes durable and nondurable goods, structures, and services. Also, price data by sector are available for detailed subcomponents. Because of the detail available in the GDP reports, this series provides comprehensive information on supply and demand conditions, including information for various types of developing imbalances over the business cycle.
Real GDP is a quarterly figure, but is released on a monthly basis with an initial estimate-referred to as the "advance" estimate-and two subsequent revisions over the following two months. The Bureau of Economic Analysis (BEA) produces the GDP figures and releases the advance estimate generally during the fourth week of the first month following the reference quarter. That is, the first quarter advance estimate is published in late April, and subsequent first estimates are released in July, October, and January. The first revised estimate for a given quarter is known as the "preliminary" estimate, and the third estimate for a given quarter is called the "revised" or "final" estimate. Annual revisions are usually released in July with the first figures for the second quarter. They cover the three prior calendar years plus the quarter(s) already published in the current year. Benchmark revisions occur about every five years with the base year tied to a recent quinquennial economic census such as the Census Survey of Manufacturers.
The switch in emphasis by the BEA in December 1991 to Gross Domestic Product from Gross National Product as the key measure of aggregate economic activity in the national income and product account(s) (NIPA) was made for several reasons. First, the move was part of a long-run objective of the BEA to make the US accounts more consistent with those of most other countries that use the United Nations System of National Accounts (UNSNA or SNA for short). The SNA emphasizes GDP instead of GNP. As a practical matter, when the BEA prepares initial estimates for GDP, there are little or no reliable data on net income from the rest of the world (factor income), which is used to derive GNP from GDP. With the switch in emphasis to GDP, the BEA no longer provides an initial estimate of GNP at the same time as the initial release of GDP. The first release of GNP is now with the first revision of GDP for a given quarter. Finally, GDP is more of a measure of domestic production than is GNP. Therefore, it more closely tracks other measures of domestic economic activity such as industrial production or employment. Gross national product is more of a measure of income since it reflects income from domestic production (GDP) plus net income from abroad.
Domestic measures relate to the physical location of the factors of production; they refer to production attributable to all labor and property located in a country. The national measures differ from the domestic measures by the net inflow -- that is, inflow less outflow -- of labor and property incomes from abroad.
Essentially, Gross Domestic Product includes production within national borders regardless of whether the labor and property inputs are domestically or foreign owned. In contrast, gross national product is the output of labor and property of US nationals regardless of the location of the labor and property. Gross National Product includes income earned by the factors of production (assets and labor) owned by a country's residents but excludes income produced within the country's borders by factors of production owned by nonresidents.
The estimates for GDP and GNP are derived from the same expenditure measures with the difference being income (net) from foreign sources. Gross National Product is equal to gross domestic product plus receipts of factor income from the rest of the world less payments of factor income to the rest of the world. As is the case for the United States, GNP exceeds GDP when a nation is earning more from its businesses, financial investments, and labor that are overseas than US nonresidents are earning on businesses in the United States that they own, plus returns on US financial investments, plus labor income for nonresidents in the United States. Receipts of this factor income consist largely of receipts by US residents of interest and dividends and reinvested earnings of foreign affiliates of US corporations. The payments are largely those to foreign residents of interest and dividends and reinvested earnings of US affiliates of foreign corporations.
For the United States, the dollar difference between GDP and GNP is very small-about one-half of 0.1 percent of real GDP in 1993. The difference between the nominal data was negligible. Hence, growth rates for these aggregates in the United States typically are very similar.
Gross domestic product is a measure of production within the national income and product accounts. There are three alternative ways of deriving GDP: sum of expenditures, sum of incomes, and sum of value added (either by industry, by firm or by establishment, depending on what data are available). In theory, GDP as measured by all three methods should be the same. This would be the case if perfect data were available. In actual practice, of the two methods primarily followed by the financial markets, it is easier to obtain reliable estimates for expenditures than for income components. Basically, expenditures are measured more directly than income. The expenditure components for GDP is also most closely followed by markets. This is partly due to most expenditure data being more readily available than some of the income data. While quarterly personal income data are released with the advance GDP release, corporate profits are not available until the following month. As stated previously, the expenditure approach to estimating GDP clearly is the method most closely followed by the financial markets. The major expenditure components are personal consumption (C), gross private domestic investment (I), government purchases (G), and net exports (X-M); they form the familiar identity of:
As already mentioned, the export and import components no longer include income from abroad (in the old identity for GNP, X and M included factor income from abroad).
The monthly personal income data and personal consumption figures are part of the NIPA framework, and the quarterly personal consumption numbers in GDP are merely quarterly averages of the monthly data. Monthly personal consumption levels are already seasonally adjusted and are on an annualized basis. The sources for personal consumption estimates are also discussed in the chapter on personal income.
Durables are the most volatile and services are the most stable. Durables are dependent on interest rates, which are cyclical, while both nondurables and services are more dependent on population trends. Overall personal consumption expenditures (PCEs) make up about two-thirds of GDP. However, this is somewhat of an awkward comparison, since some GDP components such as net exports and inventory investment are negative on an occasional basis.